The top five hidden costs for SMEs

Time is money: invoice for 14- or 28-day payment terms as a maximumCredit:
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31 December 2015 • 10:00am

Hugh Wilson

Unexpected overheads can derail your business plans. Plan for these eventualities, and you could save money – and the future of your company

An SME business plan will account for the cost of buildings, equipment, stock and staff. It shows how sales will pay for them. It’s a comprehensive analysis of cash in and cash out.

Or is it? Hidden costs can blow a hole in any start-up plan, but forewarned is forearmed. Here are five common overheads you might not anticipate.

1. Productivity problems

The productivity of employees is an SME’s most important asset. Anything that interferes with that productivity, from unnecessary meetings to email overload, is a cost to your business.

And one often overlooked cost is your office environment. “Worryingly, just 54 per cent of employees agree that their workplace enables them to work productively,” says Tim Oldman, CEO of think-tank Leesman, which publishes the Leesman Index, a measure of workplace effectiveness.

Mr Oldman believes that SMEs offering a range of different work areas for employees are best placed to maximise productivity and limit the hidden costs of underperforming staff.

2. Hiring and firing

Replacing one member of staff with another can be surprisingly costly.

In fact, a report last year by Oxford Economics for employee benefits specialists Unum found that replacing an employee on average salary can cost up to £26,595.

The sum is made up of the cost of reduced output while a new employee is bedded in (it can take 24 weeks, the report states, before a new SME worker is fully productive) and the logistical costs of recruitment, from advertising to agency fees and time spent interviewing candidates.

“The financial impact of having replacement workers learn the ropes is probably a cost that businesses have not before considered,” says Peter O’Donnell, CEO of Unum.

A speedy but thorough recruitment process can limit costs.

3. Long payment times

Research by e-invoicing company Tungsten shows that 12 per cent of the UK’s 5.2 million SMEs still have to wait 90 days or more to get paid by customers.

Costs mount from SMEs having to put enough by in cash reserves to survive, or pay fees and interest on overdrafts and loans, while waiting for payment.

“Allowing your customers 90 days to pay an invoice is incredibly bad practice - you're waiting an entire quarter before receiving payment. If you insisted on 14- or 28-day payment terms you receive money faster, can pay your own bills faster, and can reinvest the money in your business,” says Darren Fell, CEO of Crunch Accounting.

4. Protect your property

New SMEs often consider protecting their intellectual property (IP) a costly distraction, and it’s only when a competitor tries to steal their brilliant idea that the hidden costs of not doing so become clear.

“It’s important not to waste time when it comes to protecting your IP as there is often a limited window in which to act.

If you fail to file for a patent or register your trademark, a competitor may beat you to it – which can spell the end of your big business dreams,” says IP expert Elizabeth Ward, founder of Virtuoso Legal.

5. Data protection

If you store customer details there is a modest cost in making sure you properly protect them. But failing to do so can incur far more serious penalties.

“Data protection is easily overlooked by small businesses. But the costs of getting it wrong can be enormous, as companies that breach the Data Protection Act can face fines of up to £500,000,” says Tim Halstead, a data protection consultant for chartered accountants HW Fisher & Company.

Common mistakes include failing to store sensitive information, such as card details and addresses, separately – and not training staff on the importance of data protection measures.

“There is a lot of useful information available for free on the Information Commissioner's Office website, but it's worth getting a periodic check-up of how robust your standards are,” says Mr Halstead. “Data protection consultants offer 'hygiene visits' for as little as £500.”

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